Econocasts

Monday, October 24, 2016

2016.10.24 XOI.X Cycle Model Chart

XOI.X Cycle Model Chart

The phase change to the right continues, though the pace may have slowed down. There is some information to be gathered from the predicted magnitude suggesting that going forwards, prices much lower than the current levels are highly unlikely. A previous iteration of the model is shown below and here on the blog.

12 comments:

Anonymous
said...

Thanks Paolo - great work again!

It seems that expectations of a shakeout in crude oil are coming to pass, although the magnitude and timing is yet unknown. I suspect without any evidence that a low will come before the US elections proper, with the magnitude of the low being time-correlated. In other words, the longer a low takes to form the deeper it will be.

I've got two targets in mind: one shallow target not more than a dollar below current prices and just above the multi-week range before the pre-OPEC low; plus another target into the candle body of the OPEC breakout that moved very quickly indeed (almost too quickly for a lasting move).

The Z-score strongly suggests the potential for a trending move and a limited window to build positions that these levels, which might not be visited again for quite sometime - especially given the multi-week and multi-month balance of volume around these levels.

I think that a similar situation is evolving with gold, though I'm not trading that market (pulled my buy order) but may use any positive breakout as suggestive of something similar with oil (if it happens first).

Brent opex today and production cut backtracking have put Brent near your 2nd choice, maybe it bleeds more tomorrow AM or some more this week...then your z move..you would think call volume would point it out a little

It seems the expected shakeout in crude oil is coming to pass and faster than expected into the candle body of the pre-OPEC low. USO is diverging with respect to underlying crude oil with respect to WTI, which "could" potentially indicate an imminent turn. Gold is also supportive of a move higher for oil, although the correlation is too loose/sporadic to be actionable. The potential for a short-lived lower low for oil is however still possible as a springboard to new YTD highs. At the very least, some sideways movement is needed today and/or tomorrow.

The risk is a sustained lower low "at some point" (perhaps now or after US elections into EoY) if any immediate rebound is too fast and too far, volume needs to build in a reasonable manner such that neither Bulls nor Bears know which way the current trend will resolve. There is/was a volume hole around the pre-OPEC candle that informed my expectations of a shakeout to current levels, which needs to fill for a new trend to emerge (hopefully Bullish).

In terms of technical analysis across the "blogosphere", current levels are "pivotal" from various schools of thought (however rigorous one believes them to be or not). From channels to trendlines and Elliot Wave, Bears and Bulls alike have strong "evidence" to support their claims, as do macro and fundamental analysts, although macro analysts seem to be more Bearish due to OPEC disagreements. Add US elections to the mix and its clear that the next week or two is pivotal to longer-term oil behaviour.

My Bullish-biased expectations:

a) An imminent turn in WTI "at some point" potentially after a short-lived lower low or some consolidation at present pre-OPEC breakout levels from September.

b) New YTD highs followed by another correction into EoY, magnitude unknown and dependant on volume consolidation at current levels. New YTD highs may only be a few dollars above current YTD highs (say $55), but hopefully not as I had an original target of $60 that now seems optimistic at best.

c) Ultimately higher prices are expected through 2017 as per the XOI model with an optimistic target of $70 and slightly above "at some point".

RISK: Imminent API and EIA reports this week coupled with US election uncertainty and OPEC disagreement provide the catalyst (or "excuse") to drive down prices a few dollars below present levels. This may also happen as part of the expected late November or December correction into EoY, dependant on an expected rebound from current levels today or tomorrow.

Agile responses are the order of the day - getting into the start of an expected trend is never easy. In fact, its required as the "wrong side" is needed to fuel it. Hopefully the trend will be Bullish and soon, though I'm highly suspicious indeed.

In any case it seems that even my lower target may be exceeded due to political concerns - I'm now trailing buy orders above the last daily high, just in case a turn materialises before next Tuesday or Wednesday. There is a high-volume node (or area) around this area for the past two years:

https://pbs.twimg.com/media/CwNx2Z2WgAADMju.jpg:large

I don't think its likely however and WTI may visit $42/bbl in the meantime, where there is a slight volume void. Too hard to say given sentiment driven reactions across all related markets. The EIA report will likely result in an upward spike leading to new lows - far too risky to trade off except for the most nimble.

On the upside however, I was expecting a pop to new YTD highs just a few dollars above present YTD highs before a December correction of unknown magnitude. This might actually not materialise now or be minor with respect to an "assumed" post election pop.

Not really a time for longs this week, but the assumed rebound will be potentially potent. I did have a small short from late last week, but I pulled it far too early and API/EIA precludes attempting it again due to spike potential. Best to move to daily charts until later next week.

I note that gold has broken out, but oil has correlated closely with SPX, which should provide early warning of an oil turn.

Looks like we might have seen the turn in WTI last Friday and partially confirmed yesterday. Naturally US elections will add some volatility, but scaling into long positions is the order of the week. I think getting positioned here in a sensible manner (on the continued assumption that this is the turning point) is the optimal approach, especially an anticipated upward move to current and hopefully new YTD highs might not be a straight trending move. On the downside, an unexpected US election result might cause a tag of the lower weekly Bollinger at $42 or $21 this and next week (until/if OPEC agree freeze or cut details).

"I'm not sure if [$42] it'll be touched as the volatility from the US election result is high." [Nov 9th]

Thanks Chip - great insight via the BDI; WTI tentatively looks like a bottom is in place, but scaling in is essential should one last touch towards $41 or $42 take place before the OPEC meeting. As previously stated, though I'm unsure of that prospect but one must be prepared for it.

COT data suggests that if the immediate low is not already in place, then it is imminent by November 30th when OPEC meets. I'd expect the technical agreement to be agreed before ratification then, with Russia and Saudi cooperation being the major pivot point.

The next upside target is $56-$58 into EoY or Q1-2017. WTI needs to close above $46 or so THIS month, else sustained weakness can be expected for the foreseeable future.

"The next upside target is $56-$58 into EoY or Q1-2017. WTI needs to close above $46 or so THIS month, else sustained weakness can be expected for the foreseeable future." [Nov 15th]

It seems we have a breakout of WTI from its recent range of the past two weeks, coinciding with my expectation that SPX will reach and breach 2200 (though I don't trade equity indices anymore). My unevidenced biased expectation is that SPX, with perhaps WTI in close correlation will rally into EoY ($56 to $58) and fall into the US Inauguration Day on 20th January. I'm expecting any potential OPEC deal to put a floor under prices, but to struggle to boost prices unless USD consistently falls or world demand offsets US shale increases from higher prices.

USO as a proxy for WTI and also XOI has gapped up over the weekend. Statistics strongly suggest a gap fill at some point: over the past 10 years, there have been 218 total gaps with 216 filled and 2 not filled. The unfilled gaps are from last Tuesday and April earlier this year. Nearly all gaps fill within several days (most within 24 hours) with massive skew for those that don't (hundreds of days). I'm confident that if the gap doesn't fill by EoM, then it won't fill for quite sometime (beyond the horizon for swing trading).

The EoM close is crucial with $46 being a key milestone (on a closing basis) for continued gains following any natural correction or profit taking. I'm of the biased and unevidenced view that inflation expectations and dollar weakness (from US infrastructure stimulus) will drive WTI prices, along with US indices in general to even higher highs, beyond "reasonable expectations" following a correction that many will herald as the "beginning of the end".

The key is price action and its technical context, regardless of the details regarding the OPEC deal (or not) as it could be spun any number of ways. Early positioning is critical now as the peak before an eventual correction is unknown, even though it's expected to be $56 to $58.

Thanks Paolo - I'd be keen to learn when your USO neural model goes short! The low-volatility trend day yesterday and overnight session probably caught out a lot of shorters. I'm expecting some consolidation into US pit open before another opportunity for long position building.